WASHINGTON — An American Bar Association section is asking the Treasury Department for guidance on how to comply with stimulus law provisions designed to encourage banks to purchase more tax-exempt bonds from small state and local issuers.
In a seven-page letter dated Jan. 6, the ABA’s Section on Taxation told the Treasury that uncertainty remains on some key points of the provisions in the American Recovery and Reinvestment Act, which ease tax law restrictions to help spur the tax-exempt bond market. The letter was signed by Stuart Lewis, chairman of the section.
Typically, banks and other financial institutions cannot deduct the interest expense from tax-exempt holdings. However, since many small localities rely on local banks to purchase their tax-exempt offerings, a tax law exception permits banks to deduct 80% of the interest expense for bank-qualified bonds, which are bonds sold by qualified small issuers that do not exceed a specified limit on annual issuance.
The limit was $10 million, but the ARRA expanded it to $30 million for bonds issued in 2009 and 2010. The ARRA also permits the limit to be applied to individual borrowers in conduit deals rather than to the issuer, so that each borrower’s bonds are bank-qualified as long they do not receive more than $30 million of tax-exempt bond proceeds in a year.
However, the ABA attorneys said it is not clear from the tax code and legislative history how to treat several charitable organizations that operate as part of a “controlled group.” Charitable hospitals are often part of such groups, in which a member might hold the stock of or possess voting control over the governing body of another member, according to the letter.
The ABA group recommended the Treasury clarify that each separately organized and qualified charitable organization be considered a separate issuer for purposes of determining whether it meets the small-issuer limit, regardless of whether it is part of a larger, overarching group.
The group contends that since the ARRA provision was intended to boost the tax-exempt bond market by broadening the definition of bank-qualified bonds, a similarly broad reading for testing the small-issuer exception would be consistent.
The attorneys also asked the Treasury to confirm that when it comes to bonds that an issuer allocates to several charitable borrowers, the allocations be based on a “reasonable relationship” to the respective benefits each borrower received. This method is usually applied to groups of governmental entities that share proceeds from a single bond issue, they said.
The ABA lawyers also asked about uncertainties related to the requirement that state and local issuers of bank-qualified bonds designate their bonds as “qualified tax-exempt obligations,” usually in bond documents or tax certificates. Since charitable borrowers are treated as issuers under the ARRA provisions, they should be responsible for making the designations, the lawyers said.